Amazon heavily outperformed Q1 earnings expectations, reporting earnings of $7.09 per share — well ahead of the $4.72 per share predicted by Refinitiv. Profitability continues to be a bigger priority for the e-Commerce giant; its net income reached a record $3.6 billion, while its operating income of $4.4 billion represented a record 7.4% margin.
The wider margins come from growth in businesses like Amazon Web Services (AWS), advertising and third-party seller services, where profits are bigger but total sales tend to be smaller. The often reliable AWS cloud service continued its solid growth, with a 41% sales increase to $7.7 billion, although that was lower than last year’s 49% growth rate.AWS revenue represented 13% of total sales at Amazon, up from 10% in Q4 2018. AWS and competitor Microsoft Azure are in the last stages of competing for a $10 billion Department of Defense cloud contract. The winner will be announced by July 2019 at the earliest.
“On the non-AWS side, sales are slowing, with physical stores (i.e. Whole Foods) essentially flat, and we note the reduced growth is largely generated by third-party sales,” said Charlie O’Shea, VP and Lead Retail Analyst at Moody’s in commentary provided to Retail TouchPoints. “However, the real story on the retail side is margin expansion, which is up around 360 basis points to almost 6.4%, and is likely driven in large part by the rapidly-growing and higher-margin advertising business.”
Amazon’s advertising business continues to be the largest segment driving its “other” category. While the category has grown at least 60% in each of the past five quarters, growth during this quarter slowed to 36%.
As of February 2019, Amazon was expected to represent 8.8% of net digital ad revenue share in the U.S. It still trails behind Google, which is expected to have 37.2% share this year, and Facebook, with an expected 22.1%, according to eMarketer.
Overall net sales were right in line with Wall Street analyst estimates, with the company’s Q1 revenue increasing 17% to $59.7 billion, compared with $51 billion last year.
There’s one notable expectation Amazon was unable to reach. The company’s operating profit guidance for Q2 came in the range of $2.6 billion and $3.6 billion, far below the $4.2 billion Wall Street estimate, indicating heavier investments going forward.
“Amazon is expanding programs left and right, many of which have wide-reaching geographic implications (meaning expensive) and I would not be a bit surprised to see some reinvesting here to support these new initiatives,” said Jon Reily, VP, Global Commerce Strategy Lead at Publicis Sapient in commentary provided to Retail TouchPoints. “Also, Amazon Music Unlimited was launched almost silently on Monday, and while it’s ad-supported it cannot be cheap for the e-Commerce giant. In addition, Amazon’s moves in grocery and the expansion of its AWS services in APAC already have been big moves for the giant this year.”